Gold rush in Japan

Editor’s note: The following is a guest commentary from one of WND’s sponsors, Kevin DeMeritt, president of Lear Financial. If you would like to learn more about investing in precious metals, take advantage of the free information Lear Financial is making available to WND readers.

Everyone knows about the “straw that broke the camel’s back.”

You can pretty much imagine it happening. Straw by straw. The camel first slows up under the heavy load, then staggers, then, with one final piece of yellow straw, hits the ground with a broken back.

Not that it should have come as any surprise. You could tell it was going to happen. You didn’t have to have the gift of prophecy.

Likewise, when it comes to Japan, that last straw may well come April 1 of this year. Except it isn’t exactly a straw. It’s an anvil.

This anvil involves Japan’s all-important deposit insurance that has, single-handedly, maintained citizen confidence in that country’s beleaguered banking system. That’s because the protection it afforded was unlimited. What it said was, whatever you might lose to a crashing Japanese bank, no matter the amount, will be covered through government-administered insurance.

But come April 1, this insurance protection will undergo a drastic change: It will then be limited to just $75,000 – that’s the anvil – and it simply isn’t sitting well with the Japanese people.

The emergency measure that’s become an emergency itself

Unlimited deposit insurance in Japan was part of 1996 emergency legislation designed to calm an increasingly nervous population. It came as the country’s 10th-largest bank, the fourth-largest securities firm, a major life insurance company, a securities house and several smaller banks all failed. When it grew obvious that Japan’s largest financial institutions wouldn’t pitch in to help the smaller, sicker ones, unlimited deposit insurance became a necessity.

It was designed to reassure the Japanese public, and for years it did. Certainly, the scary economy would eventually straighten out and consumer confidence would be back on track. Government administrators reasoned that the limit could be safely lowered to $75,000 by 2001. Rethinking their decision, they extended the deadline to 2002. Now that we’re here, though, things are even worse. All the life signs of the ailing Japanese economy are bottoming – and that includes the life signs of the banking system, too. Some 46 small banking and credit institutions have failed in 2001. To end unlimited deposit insurance now, in the midst of an economy teetering on the brink of insolvency, could be the mother of all wrong acts at the mother of all wrong times.

For one thing, the coming change means an unthinkable $1.5 trillion of the Japanese public’s money in banks will be left unprotected. If the economy were otherwise healthy, this might not be as big an issue. But, within the current setting, it’s almost a naked admission by the government that more banks, bigger banks, are going to fail in 2002 and beyond, and there simply aren’t enough resources to cover them. After all, unlimited deposit insurance is not a trivial responsibility for any government to assume. Historically, it has cost upwards of 20 to 50 percent of an affected country’s gross domestic product just to bail out bad banking institutions.

Long lines at gold dealers

All of this isn’t lost on the Japanese people. In anticipation that nothing is going to derail limited deposit insurance come April 1, weary citizens are taking action into their own hands. Or, put another way, they’re taking gold into their own hands.

There literally are lines in front of gold dealers in Tokyo lately, an image reminiscent of the 1980 gold rush days in America. Gold dealers report brisk sales of up to four times the levels of a year ago, and even greater in some regional areas where problem banks exist. Gold prices, in terms of the yen, are at three-year highs, too. Dealers see only acceleration ahead.

This can paint a nightmarish scenario for Japanese banks. Panics don’t always happen overnight. Sometimes they need time to build momentum. They can start out as a small leak in a giant dam – the growing number of consumers now buying gold, for example. But just as that leak expands and more and more Japanese tell their neighbors that they “just bought gold and you should too before April,” a bigger chunk of that $1.5 trillion in unprotected funds will migrate to gold. As should be obvious, this would only weaken already weak institutions and hasten a scenario that the ending of deposit insurance only promised. Ominously, and as Forbes recently reported, “A recent drop in savings of 9.5 percent at smaller financial institutions (in anticipation of the end of these deposit guarantees) is a sign that this (crunch) may have already begun.”

Buying before it dawns on the American public

Of course, should even a tiny percentage of that $1.5 trillion in unprotected funds end up in gold – the asset of last resort – the price of the precious metal would go absolutely stratospheric. After all, there’s “only” been 120,000 tons of gold mined since the beginning of time, having a collective value of “just” $1.3 trillion. This market is not limitless. Indeed, migrating bank deposit cash could quickly skyrocket already bullish gold, a far likelier destination for that freed-up yen than the Japanese stock market, where $475 billion was lost in 2001 alone.

Lest you think that this is solely “a Japanese problem,” you might want to re-think. Japan’s four largest troubled banks claim assets totaling $3.7 trillion, and much of it is invested in the U.S. For just one example, there’s $333 billion worth of U.S. Treasuries and U.S. bank loans. A run on Japanese banks would only mean the calling in of several of these international loans. And, if that happened, as Forbes puts it, an “economic contraction would sweep America and the globe.”

All of which really means two things. First, since it’s going to take some time to diffuse the Japanese time bomb, the country’s gold rush is likely to last for quite some time. Secondly, in lieu of deposit insurance hanging around for another year or two, it’s only a matter of financial self-defense that you diversify your portfolio with gold – especially now, before even more massive Japanese gold buying puts you squarely behind the investment curve and that anvil lands on that poor camel’s back.